Misrepresenting Adam Smith

A correspondent sent me a link to a Guardian podcast [1] which discussed ‘Adam Smith’s big idea of the invisible hand’. Listening to it provoked me into posting this eulogy for Adam Smith as another contender for the title of ‘most misrepresented famous person in history’.

To cut a long story short: Adam Smith never even contemplated an ‘invisible hand of the market’, and the phrase was not invented until the golden age of laissez faire more than a century after Smith’s death. Smith would have opposed the idea tooth and nail; he was an enthusiastic supporter of tight regulation of bank lending, for example. The conviction right across the political spectrum that Adam Smith invented the simple not to say simplistic concept of ‘the invisible hand of the market’ has condemned his real ideas to virtual oblivion and deprived us of his extraordinarily accurate portrayal of human group psychology. His insights in that field are only now being confirmed by anthropology, archaeology and behavioural ecology. Giving Away the Planetuses Adam Smith’s insights and modern evolutionary science to explain our strange modern economic behaviour.

Adam Smith’s psychological acuity is hard to explain in an era when introspection was the only psychoanalytical technique, but one possible explanation is that his insights came from being kidnapped as a toddler and from his later pondering on that event as retold to him by his family. Smith briefly alludes to his psychological theory in his famous book Wealth of Nations but only expounds it in his companion book Moral Sentiments. It might have been better if he had entitled the latter book Wealth of Individuals, to emphasise his idea that humans seek to ‘better their condition’ not by acquiring bullion (as nations do) but rather by gaining recognition from their fellow humans for their contribution to the group.

To the Guardian podcast: the Guardian presenter used sound bites from journalist Polly Toynbee, from Eamonn Butler (Director of the Adam Smith Institute), and from philosopher John Gray to support the presenter’s view that Adam Smith invented a system of deregulation called ‘the invisible hand of the market’. The presenter (probably to the later chagrin of the participants) repeated this phrase at least twice as if it meant exactly the same as ‘invisible hand’, which shorter phrase Smith did use three times in total. (One of Smith’s three uses was to describe gravitational attraction in a book about astronomy, a field with no perceptible association with markets). The Guardian presenter described Moral Sentiments as ‘an essay of 1756’ and Wealth of Nations as ‘a book published in 1776’. His false distinction supports the mistaken view of many economists that Moral Sentiments was a lightweight early tract rendered obsolete by Wealth of Nations. In reality Smith amended and republished both books shortly before his death and was satisfied that they were consistent with each other. Some economists who fail to detect the same striving for bullion by individuals in Moral Sentiments as displayed by nations in Wealth of Nations have called this imagined inconsistency ‘The Adam Smith Problem’.

Professor Emeritus Gavin Kennedy has devoted years to publicising what Adam Smith really said, apparently to little avail. His blog highlights, among other gems, Smith’s call for tight regulation of bank lending, which is never mentioned by enthusiasts of the ‘invisible hand of the market’.[2] The Guardian does give ‘invisible hand of the market’ enthusiast Butler some credit for having invented the whole concept out of thin air, saying that Butler finds the invisible hand of the market on every page of Wealth of Nations although the shorter phrase ‘invisible hand’ only appears once and not in a market context. There is, of course, no reason to question the Adam Smith Institute’s deregulation project merely on the grounds that Adam Smith would not have given it the time of day. We should judge it purely on its merits. I detected signs of a crisis of faith in Butler’s avowal that the financial crash of 2008 was caused by an excess (sic) of bank regulation. The faithful would instead have said (and no doubt did say) ‘in 2008 a lot of suckers went broke. That just shows that the invisible hand is working fine’. Butler’s statement attempts to exculpate the Adam Smith Institute’s deregulation policy but implicitly recognises that something bad happened. Even the most fervent admirers of the invisible hand will see his explanation as an expression of regret rather than a convincing argument for further deregulation. There is an uncanny parallel with the US gun lobby’s statements that mass shootings only happen because gun control is too strict. What was the “excess banking regulation” that the Adam Smith Institute objected to prior to 2008 on the grounds that it was likely to cause the biggest financial disaster in living memory?

Thanks to his implicit remorse the Director of the Adam Smith Institute comes out of the debate quite well as does his opponent Toynbee who also spends little time on Adam Smith and debates the issue of deregulation on its merits, arguing that an unregulated economy acts like a giant pump extracting energy from the lower levels and passing it upwards to the highest (my metaphor in preference to Toynbee’s ‘trickle up economics’). John Gray’s intervention seemed to me less incisive, as he argued that myths die hard without as far as I remember identifying the myth and its author. Was Adam Smith deluded, or his interpreters? There is a real issue here, which the Guardian obfuscated by falsely putting Smith’s general credibility in question when he has nothing to do with the ‘big idea’ of the invisible hand. The issue is: was Smith spot-on when he identified the innate and irrational urge to aid one’s fellows, and to receive their symbolic approval of one’s efforts, as the driving force behind the economy?